Multifamily real estate is recognized as being a strong preforming recession resistant asset class. The demand for clean affordable housing coupled with the method of valuation found in commercial real estate provides investors with a stable investment asset that can continue to cash flow when operated correctly in even the worst economic environments. The shift in the economy over the past few years however has left many investors wondering what will happen next. Certainly, no one is able to accurately predict the future without any doubts, but we do believe there is logic to back the following predictions.
1. Prices will decline more before coming up but will not crash
The rise in interest rates has resulted in a price decrease for the multifamily (and every other) asset class that is described by an increase in Cap rates. Essentially, investors are now longer willing to pay the same price for a given amount of income due to the increased cost of debt. Additionally, many sponsors whose projects have floating debt have been forced to either pause distributions or sell prematurely in an effort to mitigate the impact of increasing interest rates. While this downward pressure on prices will likely continue on even as the Fed levels rates, we do not expect to see a crash due to the lack of supply for multifamily (particularly in B and C class) and the strong demand for returns from investors in this asset class.
2. Rent growth will decline
The surge of inflation that we saw in 2020-2022 was accompanied by a drastic increase in rent growth. Many areas that typically see annual rent growth in the 2-4% range were suddenly subjected to rent growth in the double digits. While this might be good news for investors it is not good news for residents or participants in the economy at large who work to afford drastically increasing prices across a number of goods including rent. This is why the Fed stepped in and quickly increased interest rates to combat inflation and pull price increases back to historical norms. It therefore makes sense that rent growth will likely return to the historical norms that we knew before the pandemic. This means that investors should not bank on the rent growth that we have seen from the past few years as they develop their underwriting models on new projects.
3. Demand for multifamily investing will surge once line of sight to lower rates is in view
While the currently timeline for the Fed to level off rates and then eventually begin cutting them is unknown, it is likely that they are about to level off based on the quarter percent rate increases that we have recently seen which are much less aggressive than the rate increases of 2022. Historically, it's usually about a year once rates are leveled until the Fed will make their first rate cut, but there are many factors in this economy that will play into the uncertainty for the timeline on this decision. Once the Fed begins to hint at their timeline for the first rate cut though, many investors currently on the sideline will surge back into the space with the expectation that lower interest rates will be followed by Cap rates compressing once again.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."